Capital gains on BTL to be taxed as income – don’t worry it is not going to happen.
By Kevin McDaid, Oct 11 2016 09:59AM
I recently read a very interesting article on https://www.property118.com/capital-gains-on-btl-to-be-taxed-as-income/89928/comment-page-13/#comments regarding Sections 75-78 of the Finance Bill 2016 ‘Taxation of profits from trading and investing in UK land’ which make profits made on the sale of buy-to-let property become taxable, at income tax rates. This effectively would mean that income tax would be paid at 20% instead of the equivalent 18% CGT rate applicable for individuals paying tax below the 40% higher rate. For income tax payers at 40% (>£43K taxable income in 2016/17) or 45% (> £150K taxable income) they would be even worse off as their CGT rate is just 28%. Also, bear in mind that that the annual personal CGT exemption stands at £11,100 meaning that, for a married couple/civil partnership, there would be no tax to pay on any joint gain of just over £22K.
The article was prompted by the concerns of no less a body than The Law Society.
Apparently, there were 26.000 reads of the article and 13 pages of responses to it. Some of the initial comments clearly showed how desperate some landlords felt about it:
• ‘Well, that is me pretty much done and certainly facing bankruptcy’.
• ‘Might as well order my coffin now whilst I can still afford it’.
In time, the responses became a little less emotional and offered links to other commentators on the legislation which corresponded with my initial thoughts on the matter that the legislation was not intended to impact on property investors at all. (This is not me trying to be smug by the way; I initially glanced at the article on Friday but did not get chance to return to it until Monday. I had a few doubts about its substance over the weekend.)
A couple of weeks after the initial article, this was published https://www.property118.com/landlords-will-not-be-taxed-on-capital-gains-as-income/90259/ confirming that ‘HM Treasury have now provided assurances in the form of written correspondence to at least two landlords associations that the ambiguous wording was not intentional and that capital gains made by BTL landlords will NOT be taxed as income’.
It turns out that the aim of the legislation is to ensure that non resident developers will be subject to UK tax in respect of UK property developments just in the same way as UK resident businesses are.
‘A scare story with no substance’ is how one commentator described it. I think this is incorrect. Certainly, if the initial source of the concern is The Law Society, I think it was absolutely right that the concerns were aired and HMRC requested to clarify the position.
I have, in the past, been involved in a couple of instances where legislation and the accompanying HMRC guidance has been ambiguous (in relation to the wear and tear allowance – see http://www.taxadvisermagazine.com/article/wear-%E2%80%98n%E2%80%99-tear) and, in the ability to claim capital allowances in respect of fixtures and furnishings in residential let property. As a result of representations made to HMRC by the Property Taxes sub-committee of the Chartered Institute of Taxation (CIOT), of which I am a virtual member, HMRC’s stance on both issues was, ultimately, obtained so that landlords knew where they stood. Or did they?
Sticking with the wear and tear allowance issue, this article by the CIOT: - http://www.taxadvisermagazine.com/article/update-renewals-basis-let-property, indicated that over 75% of landlords (in a survey of 628) were unaware of the legislative changes. This is why 3 years after the legislation was enacted in April 2013, it was totally turned on its head in April 2016.
The UK tax system is extremely complicated even for the professionals working in and around it.
The Government is constantly bringing in new legislation to counter what they perceive to be tax avoidance. In this instance, it was solely aimed at non UK resident property developers. HMRC guidance is there to help to clarify how they, as the enforcers of tax legislation, see the legislation applying.
Where the government perceive that there may be some tax avoidance against which they feel they may need to act immediately they sometimes legislate without initial consultations with organisations such as The Law Society and the CIOT. Such consultations often highlight the types of anomaly that arose here and would allow the legislators and HMRC (in their guidance) to show specifically what their intentions were.
It would be misleading of me to indicate that such consultations always clear ambiguities. However, they are a good starting point. Clarity is more often achieved where two parties discuss rather than one party simply seeking to impose their will.
Finally, I noted on Google the other day that they celebrated their 18th birthday. I suspect there is no 18 year old on the planet today as well known as Google (hang in there, there is a link). It is very easy to come up with masses of information on a topic these days by the press of a button. As this story showed me, it can be dangerous to look in isolation at one part of a topic without having an understanding of the fuller picture. In tax, where multiple issues can arise from what appears to be even the simplest of situations, it takes years of experience and keeping up to date with the many changes in the legislation and guidance, to appreciate the impact and intentions of the Government’s tax strategy.
What our clients said about us:
I have a portfolio of over 50 residential properties throughout the North of England.
I first came across Kevin in 2010 when he was performing capital allowances valuations in respect of houses of multiple occupation (HMO). At that point, not many accountants that I spoke to, had much of a clue about the ability to claim the allowances whilst many of those organisations who were in the know, were keen to do the valuations for a hefty fee but then really did not instil me with any confidence about the tax implications.
Kevin was different; we had an initial chat over the phone, there was no big sell and no hefty fee. Because he has a tax and surveying background, not only was he able to undertake the valuations he was able to liaise with my accountant to fully explain the tax implications and talk him through the reporting procedure.
There is no question that the tax savings I made hugely outweighed his fees.
Fast forward 5 years and there is no surprise that, once again, he seems to have a far greater understanding of the latest tax changes than the accountants of other landlords that I regularly speak with.
He has kept me fully updated on the tax implications of the loss of wear and tear and the changes in the allowability of loan interest. He has provided me with an in depth report showing how much post tax income I would have from the present day right through until 20/21 when the restriction is fully in force. It did not paint a pretty picture. In fact, I would go so far as to say, that I would almost certainly no longer be able to continue to operate as a property investor by 20/21 in a sole trader capacity. Consequently, as of 01/04/16, I am now operating as a limited company, Kevin guiding me and my accountant through the tricky incorporation maze and explaining the best profit extraction method going forward.
I would point out that we had been discussing the SDLT implications of incorporation on the run up to the Budget on 16/03/16. With over 50 properties this was going to be a hefty charge for me. We had anticipated there would be a relief for the transfer of more than 15 properties into company ownership. When it was announced in the Budget that this would not apply, Kevin contacted me on Budget day whilst I was in South America to break the news and to push for the transfer to take place by 31/03/16 in order to save an extra 3% SDLT, which I duly did.
Once again, big tax savings for reasonable costs but, most importantly to me, I know exactly where my business is going, how much money I can personally extract from the company & how much should be left in to help pay off existing mortgages or to expand the business.
It really is a no brainer to work with Kevin whether you are a large or small property investor.
We first used the tax services of Kevin almost 10 years ago when he was working for a local firm of chartered accountants. Having received an excellent service from him for a number of years (including expanding from a partnership to a limited company) we were delighted to hear that Kevin had set up on his own and had no hesitation in signing up as a client in 2012. He continues to offer a very personable and cost effective service. We would absolutely recommend him to any other small company like ours.
In addition to our company, we have a small residential property portfolio and were contemplating disposing of one of the properties in 2014/15. Had we not consulted with Kevin prior to the sale, we would have been facing an unwelcome Capital Gains Tax Liability. However, by transferring the property from sole into joint ownership we were able to benefit from a second CGT exemption which saved us almost £2,000’.
Mrs S (Company Director, Bingley)
I first met with Kevin in July 2015 because I was worried that I had been receiving rental income for 3 years but had not declared anything to the tax man. The reason I had not done so was because I had spent quite a bit doing it up when I first purchased it and, by my calculations, I had only just started to make a profit in the tax year ended 05/04/2015.
Kevin explained that not all the expenses would be allowable because some counted as improvements. He provided a fact sheet on ‘Revenue versus Capital’ indicating that those costs that counted as improvements would, ultimately, be available to set against any gains on disposal of the BTL. He also clarified the other expenses I was entitled to claim.
He calculated the net profit from letting. Even though no tax was payable he advised that the income still needed to be reported to HMRC which he duly did via a letter as, he said, the amounts involved were below the level for which a tax return was required. Apparently, this saved me penalties for failing to submit tax returns by the due date.
A tax return will be required for 2015/16 and I will be using Kevin to prepare this as, last year, he took away my concerns in sorting out my tax in a professional manner. He is not expensive and I feel comfortable dealing with him.
I would be happy to recommend him based on my experience.
BLOG INDEX - PLEASE SCROLL DOWN TO VIEW INDIVIDUAL ENTRIES.
How SDLT could change how rented property is owned by couples/civil partners.
CGT Reliefs on homes to be significantly restricted from 04/2020
Mortgage Interest Relief Restrictions - Are you ready?
Making Tax Digital (MTD) & the cash basis for landlords
Landlords lose legal challenge over BTL tax changes
When the sale of a property will be liable to Income Tax rather than CGT
CGT on BTL to be taxed as income - Don't worry, it is not going to happen
The Statutory Residence Test - Working full-time abroad
Replacement Furniture Relief.
How flexible are your pensions savings?